Anchored VWAP Trading Strategy – AVWAP Indicator Levels (Backtest)
While there are many different indicators used in technical analysis, only a few are deeply rooted in how price action is formed and how institutions, smart money, algorithms, and retail traders combined can give us a hint of how the price might react in certain situations. A popular example of such indicators is the Anchored Volume Weighted Average Price (AVWAP). You may already be familiar with VWAP, but do you know about the Anchored VWAP trading strategy?
Anchored VWAP (AVWAP) trading strategy is a VWAP trading method that involves setting an “anchor point” or starting point of the VWAP, and then comparing the current VWAP to the anchor point to determine if a security is trading at a premium or discount. If the security is trading at a premium, the strategy gives a sell signal, and if it is trading at a discount, the strategy gives a buy signal. The strategy is common among institutional traders.
In this post, we answer some questions about Anchored VWAP trading strategy and AVWAP levels.
What is the Anchored VWAP trading strategy?
Anchored VWAP (AVWAP) trading strategy is a VWAP trading method that involves setting an “anchor point” or starting point of the VWAP, and then comparing the current VWAP to the anchor point to determine if a security is trading at a premium or discount. If the security is trading at a premium, the strategy gives a sell signal, and if it is trading at a discount, the strategy gives a buy signal.
As with the traditional VWAP, it incorporates price and volume in a weighted average and can identify areas of support and resistance on the chart. But the traditional VWAP calculations always start with the first bar of the day and end with the final bar of the day. In some situations, a trader may want to analyze the VWAP line based on a starting point you prefer and also be able to extend that VWAP line beyond the end of the trading day. With Anchored VWAP, a trader can specify the price bar where calculations begin, making it easy to see whether the bulls or bears have been in charge since a very specific point in time.
Generally, the chosen starting price bar marks a shift in market psychology, such as a significant high or low, earnings, news, or other announcements. Institutional investors and traders often use this strategy to make decisions about buying or selling large blocks of stock.
What are the advantages of using an Anchored VWAP strategy?
Some advantages of using an Anchored VWAP strategy include:
- Objectivity: Anchored VWAP gives a clear and objective measure for determining if a stock is trading at a premium or discount.
- Real-time performance evaluation: Anchored VWAP is updated throughout the day, allowing you to make real-time decisions based on how the stock is performing.
- Market-neutral: The strategy is market-neutral in the sense that it doesn’t rely on predictions about the direction of the market but only focuses on the stock’s performance.
- Aligns with institutional trading: The strategy is often used by institutional traders and investors, which can make it easier to execute large trades without significantly impacting the stock’s price.
- Indicating the trend: VWAP can be used as an indicator of the trend — if the stock is trading above the anchored VWAP it may indicate an uptrend, and if it’s trading below, it may indicate a downtrend.
- Reducing impact cost: By using the anchored VWAP as a benchmark, you can aim to trade at a better price, reducing the impact cost of trading and improving the risk-reward ratio.
What types of trading styles can benefit from an Anchored VWAP strategy?
Anchored VWAP strategy can be used in a variety of different trading styles, including:
- Algorithmic trading: Algorithmic traders can use the Anchored VWAP to determine their entry levels based on how the price is performing relative to the anchored VWAP.
- Scalping: Scalpers can use the strategy to make quick trades based on small discrepancies between the current VWAP and the anchored VWAP.
- Day trading: Day traders can use daily VWAP anchor levels to determine if a stock is overbought or oversold for the trading day and make decisions about buying or selling based on that information.
- Swing trading: Swing traders can use the anchored VWAP strategy to identify entry and exit points in the market based on how the stock is performing relative to the anchored VWAP when used as weekly or monthly VWAP.
- Trend following: Traders who follow the trend can use anchored VWAP as an indicator of trend, if the stock is trading above the anchored VWAP it may indicate an uptrend and if it’s trading below it may indicate a downtrend.
It’s worth noting that the Anchored VWAP strategy is commonly used by institutional traders who use it to make decisions about buying or selling large blocks of stock without significantly impacting the stock’s price. However, it can also be used by retail traders who may want to combine it with other indicators.Top of Form
What are AVWAP levels and how do they impact the Anchored VWAP strategy?
Anchored VWAP levels refer to the different points at which the anchored VWAP line is calculated. The anchored VWAP strategy typically uses multiple levels to provide a more comprehensive view of the stock’s performance.
Some common anchored VWAP levels include:
- Daily VWAP: This level calculates the VWAP for a single trading day. It can be used to determine if a stock is trading at a premium or discount during that day.
- Weekly VWAP: This level calculates the VWAP for a single trading week and can be used to determine if a stock is trading at a premium or discount over that period of time.
- Monthly VWAP: This level calculates the VWAP for a single trading month, which can be used to determine if a stock is trading at a premium or discount over an even longer period of time.
The impact of these levels on the Anchored VWAP strategy is that the longer the period of time, the more reliable the data is because it’s less affected by short-term fluctuations. You can use multiple levels of anchored VWAP to gain a more complete view of how a stock is performing over time, and make more informed decisions about buying or selling.
For example, if a stock is trading at a premium according to the daily VWAP, but at a discount according to the weekly and monthly VWAP, it could indicate that the stock is experiencing short-term volatility, but is overall undervalued. You can use this vital information to make more informed decisions about buying or selling the stock.